OpenSea’s SEC Wells Notice Central to User Lawsuit Over NFT Sales

TLDR

• Two OpenSea users filed a class-action lawsuit claiming NFTs sold on the platform are unregistered securities
• The lawsuit cites OpenSea’s recent SEC Wells notice as evidence
• Plaintiffs argue their NFTs, including Bored Apes, are now “worthless” due to being illegal unregistered securities
• The suit claims OpenSea breached user warranties by not moderating for securities
• OpenSea is accused of unjust enrichment from fees on alleged securities sales

Two OpenSea users have initiated a class-action lawsuit against the popular non-fungible token (NFT) marketplace, alleging that the platform sells unregistered securities contracts.

The lawsuit, filed on September 19 in a Florida federal court, brings attention to the ongoing debate about the legal status of NFTs and their classification under securities laws.

Anthony Shnayderman and Itai Bronshtein, the plaintiffs in the case, claim that NFTs they purchased on OpenSea, including some from the well-known Bored Ape Yacht Club collection, have become worthless due to their “illegal nature” as unregistered securities.

The lawsuit points to OpenSea’s recent disclosure of receiving a Wells notice from the Securities and Exchange Commission (SEC) as evidence supporting their claims.

A Wells notice is a formal warning from the SEC indicating that it has conducted an investigation and may bring an enforcement action against the recipient.

The plaintiffs argue that this notice suggests OpenSea could be held liable for facilitating the exchange of unregistered securities.

The lawsuit draws parallels to recent SEC actions against other NFT projects, such as Stoner Cats 2 and Impact Theory, where the regulator determined that the NFTs in question were unregistered securities.

News of @Opensea receiving a Wells Notice shows plain and simple that the current SEC’s crusade against the crypto industry continues unabated. This is in contrast to what Vice President Harris said two weeks ago announcing her economic agenda: pic.twitter.com/cafsHJ6DhU

— Brian Quintenz (@BrianQuintenz) August 28, 2024

Shnayderman and Bronshtein argue that the NFTs they purchased on OpenSea meet the criteria of investment contracts under the Howey test, a legal standard used to determine whether a transaction qualifies as a security.

According to the plaintiffs, OpenSea’s NFT listings were “deceptive and misled the Plaintiffs into purchasing worthless and unlawful unregistered securities.”

They claim that OpenSea breached a user warranty stating that it would moderate the platform for unregistered securities.

The lawsuit also alleges that OpenSea unjustly enriched itself by charging fees and accepting funds from transactions it knew or should have known were linked to the sale of unregistered securities.

The legal challenge comes at a time when the NFT market has experienced significant fluctuations. In a recent example, a CryptoPunk NFT that sold for $23.2 million in 2022 was resold at an 80% discount for approximately $3.9 million. This price drop highlights the volatile nature of the NFT market and the challenges facing both buyers and platforms.

The lawsuit against OpenSea raises important questions about the responsibilities of NFT marketplaces and the legal status of digital collectibles. As the case progresses, it could have significant implications for the broader NFT ecosystem and how these digital assets are regulated.

OpenSea, which has not yet responded to requests for comment on the lawsuit, finds itself at the center of a legal battle that could shape the future of NFT trading and regulation.

The outcome of this case may provide clarity on whether certain NFTs should be treated as securities and what obligations marketplaces have in ensuring compliance with securities laws.

As the NFT space continues to evolve, some companies have already begun to distance themselves from the technology.

Starbucks terminated its NFT rewards program earlier this year, while gaming retailer GameStop closed its NFT marketplace after scaling back its crypto services.